CHAPTER 1 CASE 1: EFFECT OF ERRORS

During the course of audit of Manila Company, the records were reviewed at the close of the business year; the errors listed
below were discovered.

a. The co failed to record purchases of merchandise on account of P25,000 at end of 2020

b. Sale of merch on account on Dec 30, 2020 amounting to P20,000 was not recorded
until the customer paid his account in Jan 2021
c. Depr Expense on eqpt in 2020 was overstated by P10,000
d. Paid one-year insurance premium of P24,000 effective April 1, 2020
The entire amount was debited to expense acc and no adjustment was made at end of 2020
e. On Dec 31, 2020, the Company acquired a parcel of land and a bldg at a total cost of P500,000. The entire amount paid was
debited to the land acc. A reasonable estimate of the cost that should have been allocated to the bldg was P200,000. The bldg
has an est life of 20 yrs.

f. Failure to record supplies on hand at end of 2020. The supplies on hand amounted to P5,000.
g. Understatement of 2020 ending inventory worth P24,000.
h. Failure to record accrued interest on notes payable at the end of 2020. Notes payable, prinicipal amount, P100,000; interes
rate, 10%; Acquired March 31, 2020.
i. Failure to recognize unearned rent at the end of 2020 worth 12,000.
j. Goods received in Dec 2020 were recorded as purchases when paid 2020. The goods were excluded from the 2020 ending
inventory.

Kita dito sa problem yung Counterbalancing and Non- Counterbalancing Errors and the effect of these errors in net income, as
re after closing in 2020. And these effects also in 2021.

DATE ENTRY PER CLIENT CORRECT ENTRY

A. 2020 No entry (failed to record) Purchases 25,000
CBE Accounts Payable 25,000

Net Income is Overstated, bc Purchases is

Understated. COGS is also Understated
2021 Purchases 25,000 Accounts Payable 25,000
Cash 25,000 Cash 25,000

***Mali kasi dapat nga ay for 2020 yan, so

dapat retained earnings

B. 2020 No entry (failed to record) A/R 20,000

CBE Sales 20,000
Counter- ba 2021 Cash (nareceive payment n20,000 Cash 20,000
Sales 20,000 A/R 20,000
C. 2020 Depreciation Exp 10,000 NO ENTRY
NCBE Acc Depr 10,000
Non-counte 2021
Habang di mo sya cinoNO ENTRY NO ENTRY

D. 2020 Insurance Expense 24,000 Correct naman na pero dapat may adjustm
CBE Cash 24,000 eto dapat adjustment
***Tama yung entry pero may Problem: Prepaid Insurance 6,000
There was no adjustment at year-end Insurance Expense 6,000
2021 NO ENTRY Insurance Expense 6,000
Prepaid Insurance 6,000

E. 2020 Land 500,000 Land 300,000

Cash 500,000 Bldg 200,000
Cash 500,000
***No depr since Dec 31, 2020 Sila bumili
2021 NO ENTRY for depr dahil nalagay nya yung b Depr Exp 10,000
amount sa land, pero dapat meron sa bldg Acc. Dep - Bldg 10,000

F. 2020 Supplies Office Supplies 5,000

Cash Supplies Exp 5,000
No Adj entry were made
2021 NO ENTRY (kasi inexpense nya na all) Supplies Exp 5,000
Office Supplies 5,000

G. 2020 NO ENTRY Inventory 24,000

Kulang dinebit sa inventory COGS 24,000

2021 NO ENTRTY COGS 24,000

Inventory 24,000

H. 2020 NO ENTRY Interest Expe 7,500

Interest Payable 7,500
100,000 x 10% x 9/12
2021 Int Exp 10,000 Interest Expe 2,500
Cash 10,000 Interest Payable 2,500

I. 2020 Cash Rent Revenue 12,000

Rent Income Unearned Rent 12,000
No adj entry
2021 NO ENTRY Unearned Rent 12,000
Rent Revenue 12,000

J. 2020 NO ENTRY Purchasess XXX

A/P XXX
End. Inv XXX
COGS XXX
2021 Purchasess XXX A/P XXX
A/P XXX Cash XXX
COGS XXX
Inv XXX
iness year; the errors listed

The entire amount paid was

bldg was P200,000. The bldg

al amount, P100,000; interest

uded from the 2020 ending

hese errors in net income, asset, liab and

PROPOSE ADJUSTING JOURNAL ENTRY (PAJE) 2020

Retained Earnings 25,000 Net Income
Accounts Payable 25,000 A. Overstated

**Why RE? Kasi ang mga income statement acc after,

closing ay clinoclose sa Income Summary, At si Income
Summary ay clinoclose sa Retained Earnings. So
everytime na na-close na ang books, lagi sa Retained
earnings ang adjustment!
Accounts Payable 25,000
Purchases/Retained Earnings 25,000

***Dapat macancel AP ng 2020, at macancel yung entry

mo na Purchases for 2021

Acc. Receivable 20,000 B. Understated

Retained Earnings 20,000
Sales/ RE(If books are closed) 20,000
Accounts Receivable 20,000
Acc. Depr Exp 10,000 C. Understated
Retained Earnings 10,000

Acc. Depr Exp 10,000

Retained Earnings 10,000
Prepaid Insurance 6,000 D. Understated
Retained Earnings 6,000

Insurance exp/RE 6,000

Prepaid Insurance 6,000

Bldg 200,000 E. No Effect

Land 200,000

Dep. Exp/ R.E 10,000

Acc. Dep - Bldg 10,000

Supplies 5,000 F. Understated

Retained Earnings 5,000

Supplies Exp/RE 5,000

Supplies 5,000

Inventory 24,000 G. Understated

RE 24,000

COGS 24,000
Inventory 24,000

Retained Earning 7,500 H. Overstated

Interest Payable 7,500

Interest Payable 7,500

Int. Exp./RE 7,500

Retained Earnings 12,000 I. Overstated

Unearned Rent 12,000

Unearned Rent 12,000

Retained Earnings 12,000

Retained Earnings XXX J. No Effect

A/P XXX
End. Inv XXX
Retained Earnings XXX
A/P XXX
Retained Earnings XXX
COGS/RE XXX
Inv XXX
 2020 2021
Asset Liab RE, After closing Net Income Asset Liab RE, After closing
No effect Understated Overstatement Understated No Effect No Effect No effect

Understated No effect Understated Overstated No effect No effect No effect

Understated No effect Understated No Effect UnderstatedNo Effect Understated

Understated No Effect Undesrtated Overstated No Effect No Effect No Effect

No effect No Effect No effect Overstated Overstated No effect Overstated

(kasi di nya narecord yung depr exp ng bldg)

Understated No Effect Understated Overstated No Effect No Effect No Effect

Understated No Effect Understated Overstated No Effect No Effect No Effect

No Effect Understated Overstated Understated No Effect No Effect No Effect

No Effect Understated Overstated Understated No Effect No Effect No Effect

Understated Understated No Effect No effect No effect No effect No effect

NOTES:
Net Income is OVERSTATED
Purchases Understated

COGS is also Understated

Sa 2021 - Bawal na sya idebit sa Purchases kasi 2020 Purchases sya

THIS IS A COUNTERBALANCING ERROR, WHY? Last yr, kasi di narecord ang purchases,
understated ang purch & cogs, overstated ang net income. So sa 2021, dun narecord
yung purchases, which means overstated ang purchases, overstated ang COGS, and
understated ang NET INCOME
>> NCBE hanggat di naccorrect, di sya mag correct mag isa

CBE

NCBE

CBE

CBE

CBE

CBE

CBE
CASE 2 - PROPOSED AUDITING ENTRIES

ENTRY PER CLIENT CORRECT ENTRY

A. 2020 Insurance Exp 120,000 CORRECT ENTRY
Cash 120,000 At end of 2020:
***No Adjustment at Year end Prepaid Insurance 80,000
Insurance Exp 80,000
120,000 / 3 = 40,000 x unexp port (2)

2021 NO ENTRY Insurance Exp 40,000

kasi inexpense ni client lahat nung 2020 Prepaid Insurance 40,000

B. 2021 D. NO PROPOSED ADJUSTING JOURNAL ENTRY

Why? Kasi hindi nagkaroon ng recording dun sa letter B, na doble yung count pero hindi naman mali yu
kumbaga)

C. 2020 NO ENTRY Commission Exp 185,000

Commission Payable 185,000
***Upon sale nag rrecognize ng
commission exp

***Ang nangyari dito, nagbayad si

customer nung 2020, pero irrecognize
when it was collected
2021 Commission Exp 185,000 Commission Payable 185,000
Cash 185,000 Cash 185,000

D. D. NO PROPOSED ADJUSTING JOURNAL ENTRY

Why? Kasi wala namng error, nagkaroon lang ng change in acctng estimate, prospective adj lang t
retrospectively

E. 2019 Repairs Exp 500,000 Machinery 500,000

Cash 500,000 Cash 500,000

NO ENTRY FOR DEPR Deprec Exp 50,000

Acc Depr - Machinery 50,000

2020 NO ENTRY FOR DEPR Deprec Exp 50,000

Acc Depr - Machinery 50,000

2021 NO ENTRY FOR DEPR Deprec Exp 50,000

Acc Depr - Machinery 50,000

#6 ACCOUNT THE ADJUSTMENTS IN THE RETAINED EARNINGS FROM A - E

A. Credit of 80,000
B. No Entry 0
 C. Debit of -185,000
D. No Entry 0
E. Credit of 400,000
Retained Earnings, Beg 295,000
Expenses Insurance Exp -40,000
Commission Exp 185,000
Depreciation Exp -50,000
RE, after closing 390,000 E.
 PAJE COMPOUNDED ENTRY FOR 2021
Prepaid Insurance 80,000
Retained Earnings 80,000
COMPOUNDED ENTRY NG 2020 & 2021
Prepaid Insurance 40,000
Insurance Exp 40,000 A.
Retained Earnings 80,000
Insurance Exp 40,000
Prepaid Insurance 40,000

URNAL ENTRY
pero hindi naman mali yung narecord. (Pampalito lang sya

Retained Earnings 185,000 COMPOUNDED ENTRY NG 2020 & 2021

Commission Payable 185,000 Retained Earnings 185,000 C.

Commission Exp 185,000

Commission Payable 185,000

Commission Exp 185,000

URNAL ENTRY
ate, prospective adj lang tayo, di tayo nag cchange ng

COMPOUNDED ENTRY NG 2020 & 2021

Machinery 500,000 Machinery 500,000
Reta. Earnings 500,000 Depr Exp 50,000
Retained Earnings 400,000
Retained Earnings 50,000 Acc. Depr 150,000 B.
Acc Depr - Machinery 50,000

Retained Earnings 50,000

Acc Depr - Machinery 50,000

Depr Exp 50,000

Acc Depr - Machinery 50,000
CASE 4
Cash 2020 2021 WORKING CAPITAL 2020
A. -120,000 120,000 CBE Unadjusted,WC 360,000
B. 180,000 -180,000 CBE Adjustments -120,000
C. 0 -50,000 (CA-CL) 180,000
60,000 -110,000
Adjusted 420,000

NET INCOME 2020 2021 RETAINED EARNINGS 2020

Unadjusted,NI 510,000 480,000 Unadjusted,RE 400,000
Adjustments due
to errors
60,000 -110,000 60,000
Adjusted NI 570,000 370,000 Adjusted 460,000
 2021
520,000

-50,000
470,000

2021
650,000

-50,000
600,000
CASE 8
2019 Notes 2020 Notes 2021 Notes 2022

NOTE 2 -13,000 13,000 -11,180 ibab 11,180

less allik
since di
nalagay kasi sa
sa EI, Kasi sale na inven
10,000 nga (10,000) tlg 8,600 tory (8,600)
binawas
agad sa
NOTE 3 inventory 12,200 -12,200
, ibabalik
mo yung
10k
NOTE 4 -7,815 -6,886 -10,133

NOTE 5 (3,168) (2,473) (1,217)

NOTE 6 -2,800 2,800 1,600

-1,600 -2,240
ADJUSTMENTS -16,783 Oversta 7,041 Under -26,770 Over

NOTE 1
Unadjusted Net Income 143,200 222,800 207,160
Adjustments -16,783 7,041 -26,770
Adjusted Net Income 126,418 C. 229,841 A. 180,390 B.

FOR PAJE
Add lahat ng Adjustments -16,783 2019
7,041 2020
-26,770 2021
Adjustment to RE -36,511 B.
(Net Debit, kasi overstated RE, so need bawasan, ang normal credit ng RE is Credit eh)
 SALES *Note 4
2019 2020 2021
Unadj sales 1,880,000 2,020,000 3,590,000
-13,000 <<Note 2 13,000 <<Note 2 -11,180 <<Note 2

12,200 <<Note 3 -12,200 <<Note 3

Adjusted Sales 1,867,000 2,045,200 3,566,620
0.50% 0.50% 0.50%
Warranty Exp 9,335 10,226 17,833
Recognized -1,520 -3,340 -7,700
Addtnl Warranty 7,815 6,886 10,133

ADJUSTED SALES** Note 5

2019 2020 2021
Adjusted Sales 1,867,000 2,045,200 3,566,620
0.25% 0.25% 0.25%
Bad Debts Expense 4,668 5,113.00 8,917
Recognized -1,500 -2,640 -7,700
Additional Recognition f 3,168 2,473 1,217

ng RE is Credit eh)
CASE 3 - EFFECTS OF ERROR ON NET INCOME

2019 2020 2021

Unadj Net Income 320,000 402,000 367,000
ERRORS
A. recorded twice -100,000
B. purchased -24,000 24,000
C. salary omitted -47,000
2019 -35,000 35,000
2020 47,000
2021 -29,000
D. invty overstated -40,000 40,000
E. unexp insurance 22,000 -22,000
F. Int receivable 12,500
G. Sale on Eqpt -120,000
Loss on Sale -30,000
Depre 25,000
ADJUSTED NET INCOME 158,000 352,000 337,500

G. Computation
Eqpt Cost 250,000
Less: Depr -100,000
CV of Eqpt 150,000
Sold at 120,000
Loss on Sale 30,000

Depr 25,000
CASE 5
2020 (NI) 2021 (NI) 2021 (RE)
Merchandise Inventory
2020 50,000.00 (50,000.00)
2021 100,000.00 100,000.00
Accrued Salaries
2020 (436,800.00) 436,800.00
2021 (390,000.00) (390,000.00)
Accrued Interests Income
2020 129,600.00 (129,600.00)
2021 106,500.00 106,500.00
Prepaid Insurance
2020 192,000.00 (192,000.00)
2021 153,900.00 153,900.00
Advances from Customers
2020 (235,200.00) 235,200.00
2021 (280,500.00) (280,500.00)
Machinery
2020 282,000.00 282,000.00
2021 261,000.00 261,000.00
Depreciation Expense
2020 (14,100.00) (28,200.00) (42,300.00)
2021 (13,050.00) (13,050.00)
NET EFFECT OF ERRORS (32,500.00) 210,050.00 177,550.00
2021 (WC)

100,000.00

(390,000.00)

106,500.00

153,900.00

(280,500.00)

(310,100.00)
CASE 7

2020(NI) 2021(NI) 2020 (WC) 2021 (WC)

Ending Inventory
2020 100,000.00 (100,000.00) 100,000.00
2021 (90,000.00) (90,000.00)
Depreciation Expense
2020 (20,000.00)
Insurance Premium
2020 75,000.00 75,000.00
2021 (25,000.00) (25,000.00) (25,000.00) 25,000.00

Sale of Machinery 160,000.00 160,000.00

130,000.00 (55,000.00) 150,000.00 95,000.00
2020(RE)

100,000.00

(20,000.00)

75,000.00
(25,000.00)

130,000.00